Hertler Market Signal Update

#644 May 19, 2013

Editor, Wally Hertler

Indicators are mixed: some very bearish, some very bullish

The Smart Money Index again climbed just above the 50-day moving average. A declining trend can be considered bullish because of the sometimes inverse relationship between the SMI and stock prices. However, the minor divergence between the new S&P high and the lack of a new low in the SMI continues, and is a concern.

The late market component (LMC) of the Smart Money Index surged through the descending trend line to a new recovery high – very bullish. The only concern is that, with stocks making new highs, the LMC remains below its 7/24/2012 high.

The EMC (early market component of the SMI) rallied nearly to its earlier high. A rising trend is consistent with a rallying stock market.

Barron’s Confidence Index continued its modest rally last week to 70.3.

The smart money OEX put/call ratio has fluctuated in a range that can be defined as bearish around 1.9 and bullish around 1.4. The ratio plunged well below 1.4, which is the “buy” area. This should be quite bullish.

The “smart money” OEX 15-day P/C open interest is little changed from last week. Although it is below some past bearish peaks, it is approaching a long term descending trend line.

The equity put/call ratio fell to the lowest level in several years. It is very bearish.

The total put/call ratio continued to fall last week. Although bearish, it is not at a multi-year low as is the equity p/c ratio.

The small cap/DJIA ratio rose climbed to the neckline of the recent head and shoulders top. Note that the much larger, older H & S neckline provided a temporary barrier when first tested from below.

The ratio of the NASDAQ Composite to the S&P 500 stalled out near its high as the NASDAQ Composite soared to a new recovery high.

The AAII Member Bullish Oscillator is above zero, but well below the peaks that have occurred at market tops.

The Investment Advisors’ Bullish Sentiment Oscillator climbed to the highest level since May 2011 near a market top.

The Citigroup Panic/Euphoria Model (from Barron’s) continues to climb toward the Euphoria level. If we project the series of higher lows and higher highs in the Model into the future, we should expect the next top to be well into the Euphoria zone.

The Smart Money Index and its components are bullish, but divergences with stock indexes are present in the SMI and LMC, which could foreshadow at least a short term change in trend.

The OEX put/call ratio is very bullish, but the corresponding open interest put/call ratio is becoming bearish. The equity put/call ratio is very bearish, and the total put/call ratio is becoming bearish. Thus, both the smart money and the dumb money are buying calls heavily.

The NASDAQ/S&P 500 ratio is bullish at a new high, but a small divergence is in place.

The AAII member bullish sentiment oscillator made a quick reversal from very bearish sentiment to bullish sentiment influenced, no doubt, by new highs in the stock indexes. The investment advisors’ sentiment is approaching exuberant.

The data are mixed, long term bullish, but consistent with a short term/intermediate term top nearby.